When JPMorgan Chase took over Bear Stearns more than a decade ago, it got two traders with a new trick.
Their strategy: Use multiple fake orders to manipulate the prices of precious metals futures. The maneuver, adopted by the traders’ new colleagues at JPMorgan, became part of a spoofing and rigging campaign so expansive that federal authorities have likened it to a criminal enterprise operating inside the biggest U.S. bank.
In a criminal indictment unsealed on Monday, U.S. prosecutors accused three JPMorgan traders of rigging futures trades in precious metals for nearly a decade, making millions of dollars for the bank at the expense of counterparties that included the bank’s own clients.
The charges were the latest turn in a yearslong investigation that has previously yielded guilty pleas from traders at several banks, including two from JPMorgan. Prosecutors said more than a dozen JPMorgan employees ultimately helped make manipulative “spoof” trades for the bank, in part by using the strategy their new colleagues brought in May 2008.
The pair, Gregg Smith and Christiaan Trunz, showed their new JPMorgan colleagues “a new style of layering multiple deceptive orders at different prices in rapid succession,” prosecutors wrote. The strategy made their market spoofing more difficult to execute and detect, prosecutors wrote in the indictment of Smith and two others. Trunz pleaded guilty last month and is cooperating with authorities.
The strategy was adopted by Michael Nowak, who was JPMorgan’s global head of precious metals trading when he was put on leave last month.
JPMorgan declined to comment.
Federal prosecutors charged Nowak, Smith and a third man, Christopher Jordan, of “conspiracy to conduct the affairs of an enterprise involved in interstate or foreign commerce through a pattern of racketeering activity” — counts more commonly known as RICO charges. That language, rarely used in big bank cases, suggests that JPMorgan may face deeper legal jeopardy that goes beyond the individuals who have already been prosecuted.
Jordan and Nowak appeared in handcuffs in federal court in Newark, N.J., where U.S. Magistrate Judge Michael Hammer released them on $250,000 bond. They each face as long as 30 years in prison on the most serious count.
Jordan was released to the custody of his parents pending his admission this week into a residential treatment program for alcohol. Hammer said Jordan must abstain from alcohol. “Chris Jordan is innocent of these heavy-handed charges, and we intend to defend him vigorously,” his attorney, Jim Benjamin, said.
If directed by court officials, Nowak, 45, should undergo mental health testing or treatment, the judge said. His lawyers, David Meister and Jocelyn Strauber, said it was “truly regrettable” that prosecutors charged him because he did “nothing wrong.” They said he’d be fully exonerated.
The judge ordered that they have no contact with co-defendants, witnesses, and current or former employees of JPMorgan’s precious metals desk unless their lawyers are present. Both men will be arraigned Oct. 4 in federal court in Chicago, where the case was brought.
Jordan was charged with three counts of conspiracy and fraud. Smith and Nowak were indicted on six charges, including conspiracy, fraud and spoofing. According to the indictment, the JPMorgan traders defrauded bank clients who had bought or sold “barrier options” by trading futures contracts in a way that sought to push the price toward a level where JPMorgan would make money — or at least away from a price level that would cause the bank to lose money.
The Commodity Futures Trading Commission also filed a lawsuit against Nowak and Smith on Monday and settled a suit against Trunz.
The JPMorgan investigation grew out of a multibank U.S. crackdown on manipulation of commodities markets using techniques including spoofing, in which traders place orders without intending to execute them to try to move prices in their favor. The Justice Department had already brought criminal charges against 16 people, including traders who worked for Deutsche Bank AG and UBS Group AG. Seven pleaded guilty, one was convicted at trial and another was acquitted.
Guilt Admissions
Trunz and the other former JPMorgan trader who admitted guilt said the manipulation was routine, sanctioned by higher-ups and went on for years.
“While at JPMorgan I was instructed by supervisors and more senior traders to trade in a certain fashion, namely to place orders that I intended to cancel before execution,” former trader John Edmonds said at a October 2018 hearing, after admitting to commodities fraud and conspiracy. Edmonds entered into a cooperation agreement with the CFTC in July.
Trunz told a federal judge in Manhattan last month that spoofing trades of precious metals was rampant at the bank and that he learned the technique from other traders at Bear Stearns and JPMorgan. Trunz, who entered his guilty plea on Aug. 20, said he manipulated futures markets for gold, silver, platinum and palladium from offices in New York, London and Singapore from 2007 to 2016.
JPMorgan bought Bear Stearns in a marriage arranged by the U.S. Federal Reserve during the height of the financial crisis in 2008.
Already, people inside JPMorgan were using deceptive trading methods, prosecutors said. Their new colleagues brought new ones. In May, the same month the deal was completed, Smith executed the deceptive-layering technique, the indictment said.
The new style involved the layering of multiple deceptive orders at nine different prices in rapid succession that together were larger than the portion visible to other traders in the marketplace, known as “iceberg orders.” Prosecutors said this trading style “took hold of the precious metals desk” at JPMorgan and was adopted by Nowak and other conspirators.
The indictment lays out dozens of trades that prosecutors allege are just a tiny fraction of the the thousands of transactions the conspirators made as part of the scheme. The charges also pull from electronic chats between the traders that prosecutors allege serve as examples of the criminal purpose behind the deals.
In an electronic chat on Feb. 24, 2009, less than a year after Trunz arrived from Bear Stearns, he had the following conversation with a co-conspirator identified only as “CC-7” in the filing:
Trunz: so you know its gregg bidding up on the futures trying to get some off
CC-7: sweet mate
Trunz: In case you were watching some large bids come into market
CC-7: appreesh
CC-7: that worked!
